Sunday, June 16, 2024

UBS sees small caps are attractively valued – here is why

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syahrir maulana

UBS analysts believe that small caps (NYSEARCA:IWM) are attractively valued, even after a prolonged period of underperformance.

Smaller companies should benefit from central banks beginning to cut interest rates since they are more reliant on floating-rate debt, wrote Strategist Matthew Carter in a UBS House View Briefcase note.

The Russell 2000 (IWM) is up 1.43% so far year-to-date, compared to 12.2% for the S&P 500 (SP500), and over the past five years, the Russell 2000 has advanced more than 35% while the S&P 500 has advanced more than 87%.

In addition, the S&P 600 Small-cap Index (SP600) trades at a discount of almost 30% compared to the large-cap index, based on forward PE.

But analysts believe that valuations are attractive for the small caps after a long period of underperformance, both in the U.S. and in Europe. “Small-caps are more reliant on floating-rate loans, so they stand to gain more from rate reductions from the Fed and the European Central Bank later this year.”

More importantly, they believe that EPS growth for small caps could outpace the broader index this year in the U.S.

Both U.S. and European small-cap stocks would be beneficiaries of “a more positive scenario” with robust U.S. GDP growth, falling U.S. inflation, and faster-than-expected rate cuts, wrote Carter.

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